UK and International Tax news
Supreme Court Rules Against Bankers Bonus Schemes
Thursday 31st March 2016
The Supreme Court has recently found in favour of HMRC in two cases which concerned schemes designed to avoid the payment of income tax on bankers’ bonuses by taking advantage of exemptions under s.425(2) ITEPA 2003, which have now been superceded.
In UBS AG (Respondent) v Commissioners for HMRC (Appellant) and DB Group Services (UK) Ltd (Respondent) v Commissioners for HMRC (Appellant) [2016] UKSC13, HMRC were appealing against the Court of Appeal’s decisions in finding for the two banks.
Under the schemes, the banks decided to award discretionary bonuses to their employees, but rather than paying the bonuses to them directly, the banks instead used the amount of the bonuses to pay for redeemable shares in offshore companies set up for the purposes of the schemes. The shares were then awarded to the employees in place of the bonuses. Conditions were attached to the shares making them subject to forfeiture if a contingency occurred, so as to qualify for the exemption. In the UBS case, the contingency was a specified rise in the FTSE 100 within the next three weeks. The contingency was unlikely to occur, and it was also hedged against so that the employees would lose out slightly, but not significantly, if it did occur. In the DB case, the contingency was the employee’s being dismissed for misconduct or voluntarily resigning within the next six weeks. Once the exemptions had accrued, the shares were redeemable by the employees for cash.
HMRC thought that tax should be assessed as if the employees had been paid in cash the amount of the bonuses allocated to them. UBS and DB’s appeals to the FTT were dismissed. The UTT heard the cases together and allowed UBS’s appeal. DB’s appeal was dismissed on the basis that the scheme failed to comply with a technical requirement for exemption. The Court of Appeal dismissed HMRC’s appeal in the UBS case, and allowed DB’s appeal.
The Supreme Court unanimously allowed HMRC’s appeals, with Lord Reed giving the lead judgment.
In his judgment, Lord Reed drew on the findings in WT Ramsay Ltd v CIR 1982 [AC300] which extended the purposive approach to statutory construction to tax cases. In particular, the analysis of the facts depends on that purposive construction of the statute. Taxing statutes generally draw their life blood from real world transactions with real world economic effects. Where an enactment is of that character, and a transaction, or an element of a composite transaction, has no purpose other than tax avoidance, it can usually be said that to allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic.
Where schemes involve intermediate transactions inserted for the sole purpose of tax avoidance, it is quite likely that a purposive interpretation will result in such steps being disregarded for fiscal purposes.
In the present appeals, Lord Reed began by asking whether a purposive interpretation of the legislation was possible. The context of the specific legislation and the background to its enactment provided some indication of Parliament’s intention which was broadly identified in Grays Timber Products Ltd v Revenue and Customs Comrs [2010] UKSC 4 as being:
(i) to promote employee share ownership by encouraging share incentive schemes;
(ii) since such schemes require benefits to be contingent on future performance, creating a problem if tax is charged on the acquisition of the shares, to wait and see in such cases until the contingency has fallen away; and
(iii) to counteract consequent opportunities for tax avoidance.
The background to the legislation indicates that it was intended to address practical problems, and to forestall opportunities for tax avoidance. Lord Reed felt that it was difficult to accept that Parliament intended to encourage by exemption from taxation the award of shares to employees, when the award of such shares has no purpose other than the obtaining of the exemption itself.
For further details on the judgment in these cases, please contact Keith Rushen on 0207 486 2378.
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